5 December 2024: Starmer refuses to repeat his pledge on growth

Bank of England Governor Andrew Bailey predicts the Monetary Policy Committee will sanction four interest rate cuts in 2025. However, he remains guarded about whether he believes that his colleagues will vote for a cut at their December meeting.

Speaking at the Financial Times Global Boardroom event, Bailey noted that while inflation had briefly returned to the BoE’s 2% target over the summer, it rose above target again in October, highlighting ongoing price pressures.

Assuming that each cut is twenty-five basis points, it is doubtful that one hundred points of cuts in total will raise rates to a level that supports growth.

Addressing global trade risks, Bailey said estimating the inflationary impact of rising trade tariffs, particularly under a potential second Trump presidency, remains complex due to variables such as exchange rates and international reactions.

Bailey’s comments were supported by the OECD which said in its annual review, published yesterday that UK inflation would also surpass previous forecasts next year, and upgraded growth projections for the economy, because of a boost from October’s budget.

The OECD said the global economy would “remain resilient” over the coming years but that “risks and uncertainties are high.”

Meanwhile, UK GDP is predicted to rise by 0.9% this year. This is a downgrade from its previous 1.1% forecast after recent data from the Office for National Statistics (ONS) showed that the economy grew by only 0.1% in the third quarter of the year.

“But momentum is positive nevertheless, with retail sales on an upward trend since early 2024,” the report added.

Sir Keir Starmer refused to repeat his manifesto pledge to make the UK economy the fastest growing in the G7.

Labour promised ahead of the general election to “kickstart economic growth to secure the highest sustained growth in the G7”.

Kemi Badenoch, the Tory leader, asked Sir Keir at Prime Minister’s Questions: “In his manifesto, he committed to making Britain the fastest growing economy in the G7. Does he stand by his pledge?”

Sir Keir dodged the question.

The premier invited Mrs Badenoch to “look at the OECD report of this morning which is upgraded growth for next year and the year after, which now puts us on target to be the highest growing major economy in Europe in the next two years.”

Sterling continued to rally following its fall on Monday, although this is more due to the prospects of a rate cut in the U.S. than any Sterling strength.

It reached a high of 1.2721 and closed at 1.2703.

A combination of FOMC member’s comments and this week’s data releases point to the rate-setting committee voting for a cut in the Fed Funds rate at their meeting.

According to the OECD, the U.S. economy’s growth is predicted to slow over the next two years.

In its latest report on the global economy, the OECD said that inflation in the U.S. has continued to fall despite GDP growth and that state governments were in “strong budget positions” due to federal aid provided during the pandemic, which crippled important parts of the economy.

The report said: “With immigration expected to step down from recent peaks, labour demand cooling somewhat, and less scope for households to further draw down savings, consumption growth should soften, though remain solid. Meanwhile, business investment is projected to expand moderately.

“With inflation showing signs of settling at a level consistent with the Federal Reserve’s target, further easing of monetary policy is likely to be warranted over the next two years. Large budget deficits are expected for the foreseeable future, while fiscal pressures from ageing are rising, underlining the need for a significant fiscal adjustment over the medium term.”

The Fed declined to comment on the report specifically, although several FOMC members were again out in force providing their views on the prospect of a rate cut in two weeks.

St Louis Fed President Albert Musallem said that he believes that rates are at appropriate levels and urged caution in cutting rates. He is the first FOMC member to speak this week who did not back, either directly or obliquely, a cut in rates.

The Federal Reserve could risk cutting “too much too fast,” Musalem said, while other officials have said there is room to reduce “restrictive” borrowing costs.

Meanwhile, Fred Barkin, President of the Richmond Fed, widened the conversation and was willing to discuss possible consumer reactions to the introduction of tariffs on the import of finished goods that have been threatened by President-elect Trump.

So far, Fed officials have been loath to speculate, but Barkin expressed some forthright views.

The economy has entered a new phase with consumers able to push back on prices successfully, but new tariffs from President-elect Trump could usher in another round of price increases and after years of inflation, consumers will be more inclined to take it.

Another piece of the employment jigsaw was revealed yesterday as the ADP data for private employment in November was released. It showed that 146k new jobs were created in the private sector, down from a downwardly revised 184k in October and marginally below the market’s 150k estimate.

The dollar index saw a particularly volatile day yesterday, trading between 106.72 and 106.06 and settling moderately higher at 106.37.

In what may only be described as a classic understatement, ECB President, Christine Lagarde described the outlook for the Eurozone economy as “uncertain.”

French Prime Minister Michel Barnier expected a rough ride in the French Parliament as he pushed through more than sixty billion euros of tax increases and public spending cuts in a move which upset both the left and right of French politics.

While there was no question that the left would support such a move, The leader of the far-Right National Rally party, Marine Le Pen, had an opportunity to save Barnier’s fragile government which she chose not to take.

In the subsequent vote of confidence, Barnier’s Party was defeated, which left the political situation in utter chaos.

There will be no dissolution of the National Assembly or early elections until July 2025, as the Constitution stipulates a minimum period of one year between elections. President Emmanuel Macron will have to appoint a new Prime Minister, who will have to form a new government.

With the National Assembly highly polarized and divided into three main camps left, centre-right and far-right, finding a new prime minister who will not face a motion of no confidence directly will be an exceedingly difficult mission. It is therefore likely that France will remain without a government for several weeks if not months.

It may be necessary for Macron to introduce a politically neutral bureaucrat to the role, simply to ensure that the business of government doesn’t grind to a complete halt.

A provisional budget, which simply reproduces the 2024 budget, will be put in place. The various parliamentary groups have indicated that they will vote in favour of a ‘special law’ allowing the 2024 budget to be extended into 2025, pending the vote on a real budget.

The German economy will grow by only 0.1% next year, following two consecutive years of contraction, according to the forecasts of the German Economic Institute IW.

The stability in the service sector is just enough to compensate for the continued declines in the industrial and construction sectors, according to IW, an economic institute favoured by employers.

This is no longer just a cyclical downturn, but a severe structural crisis, the report said. The collapse of Germany’s ruling coalition is set to bring more economic pain in the months ahead. The governmental vacuum in Germany paralyzes and unsettles investors.

The euro barely reacted to the news from France since the vote took place after the markets were closed. It closed at 1.0512 but could see greater volatility today as investors react to the overall political situation where the region’s two largest economies are effectively frozen politically.

Have a great day!